What is a PMSI and how does it affect perfection priority?

• A. A purchase-money security interest; often has special priority rules, sometimes automatic perfection for consumer goods; must be correctly filed.
• B. PMSI has no special priority; standard rules apply.
• C. PMSI always requires perfection by possession.
• D. PMSI is not related to security interests.

Answer: (D)

A PMSI is a purchase-money security interest—the lender’s security in collateral that was financed to buy that item. Because the financing is tied to the purchase, a PMSI often gets special treatment in priority rules. If the PMSI is properly perfected, it typically has priority over other security interests in the same collateral, sometimes even over previously filed liens, as long as the perfection requirements are met (filing, control, or possession as appropriate). For consumer goods, perfection can sometimes occur automatically when the debtor acquires possession, meaning explicit filing isn’t always needed to obtain priority, while for other collateral like inventory or equipment, filing a financing statement is usually required to preserve the PMSI’s priority. In short, a PMSI is a security interest created to finance a purchase, and it can enjoy a higher priority if perfected correctly under the applicable rules.